Don't Mess With Taxes

Some come to the Cayman Islands for the beauty of Seven Mile Beach and other natural recreational areas. Others enjoy the Caribbean locale for financial and tax reasons.

For more than a decade, wealthy U.S. tax evaders have taken advantage of a gaping tax law loophole that allows them to stash billions in foreign bank accounts, according to a recently released congressional report.

Even though the 2010 Foreign Account Tax Compliance Act (FATCA) requires them to report any non-U.S. accounts and pay taxes on all income earned, too many non-taxpayers are using what the Senate Finance Committee report describes as a "shockingly easy" process involving shell companies abroad.

Foreign shell companies are established and registered with the Internal Revenue Service as offshore financial institutions. The IRS then issues the entities unique Global Intermediary Identification Numbers, or GIINs.

Obtaining this designation relieves the newly-declared banks of FATCA's requirement to investigate whether these newly-designated banks are held by Americans, according to the report.

Offshore money in largest-ever U.S. tax evasion case: This shell bank loophole in FATCA was exploited by billionaire Robert Brockman, who was charged with evading taxes on over $2 billion in income, said Chair Sen. Ron Wyden (D-Oregon) in a statement accompanying the release on Aug. 24 of the report, which was a year in the making.

Brockman's alleged tax scheme was described by IRS and other federal investigators as the largest tax evasion case in history. Brockman died earlier this month, but a civil case against his estate is proceeding. The Brockman investigation was the impetus for the Senate Finance Committee report.

The map below is from the report and shows, per court filings, what were key Brockman linked entities that were able to exploit the shell bank loophole.

Based on Brockman court documents, Senate investigators traced entities set up in Bermuda, Cayman Islands, Malta, Nevis, Switzerland, Singapore, Guernsey, and the British Virgin Islands.

Each of those locations have at times been cited by global tax officials tax haven nations. These tax-haven based foreign entities then hid billions in untaxed income.

Some of the transactions occurred before FATCA became law, but in others, the entities had IRS-issued GIIN numbers, prompting some foreign banks to determine that "no further review, identification, or reporting is required with respect to the account."

'Shockingly easy' way to avoid reporting: The Senate Finance Committee report called the loophole process "shockingly easy."

Wyden elaborated in his statement, echoing the report by noting that Senate Finance Committee investigators found it "alarmingly simple" to obtain an IRS GIIN number.

A shell company submits the short IRS Form 8957, or registers via an online portal. Applications to obtain a GIIN number and become a foreign financial institution under FATCA are nearly always approved without meaningful review by IRS personnel. IRS representatives told committee staff the IRS does not contact the financial institution's FATCA Responsible Officer prior to issuance of the GIIN. In addition, the IRS does not ask questions about the entity's assets, source of funds or wealth, beneficial ownership, or business and investment activities.

"There are hundreds of thousands of shell companies in offshore tax havens that have been turned into IRS approved banks with virtually no scrutiny by the IRS," added Wyden. "It doesn't take a rocket scientist to see how this loophole leads to billions in tax evasion …."

100s of 1,000s of shell banks: Wyden also noted that there are hundreds of thousands of possible shell banks in offshore tax haven jurisdictions.

"In the eight countries where entities linked to Brockman were established, there are more than 128,000 entities registered with the IRS as financial institutions under FATCA," the committee chairman said.

"In the Cayman Islands alone, there are more than 84,000 IRS approved financial institutions, more than that nation's entire population," Wyden added.

That Caribbean island's impressive, but distressingly excessive when it comes to tax evasion, number of financial institutions earns this weekend's By the Numbers recognition.

Bolstering tax haven investigations: The shell bank loophole report also included recommendations to make it more difficult for wealthy U.S. tax cheats to stash funds overseas in secret offshore accounts. They include:

• Screening GIIN applications more rigorously;
• Strengthening the IRS Whistleblower Office;
• Adding IRS resources to audit large foreign partnerships; and
• Taking Congressional and Treasury Department action to toughen due-diligence requirements for large money transfers.

The overall tax enforcement resource issue, noted Wyden, is getting a boost from the $80 billion in funding for the IRS in the recently enacted Inflation Reduction Act.

As to that last point, Wyden said that as "Finance Chair, I'm also working on legislation to close this loophole."

You also might find these items of interest:  

• Federal FBAR suit seeks $26 million in penalties
• Swiss banker wanted in U.S. tax evasion cases escapes IRS clutches
• Defendant's death ends IRS' largest individual criminal tax fraud case

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